Author: Du Yu, Wall Street News
On Tuesday, September 3, the first trading day of September after the long weekend of the U.S. stock market, "tragic" became a very appropriate adjective for it, and "plunge" can also refer to Nvidia and a number of chip stocks behind it that led the decline throughout the day.
Nvidia opened 2.8% lower and then continued to fall, closing down 9.5%. The share price fell to $108, the lowest in three weeks since August 9. The market value shrank by $279 billion, and the total market value moved further away from the 3 trillion mark. Nvidia's two-fold long ETF fell about 19%.
The Philadelphia Semiconductor Index, the industry benchmark, plunged 7.8%, falling below the 5,100 to 4,800 mark to its three-week low since August 12. The SMH ETF tracking the benchmark fell 7.5%, its biggest one-day drop in more than four years.
Other chip stocks are not doing well. Intel, which competes directly with Nvidia, fell nearly 9%, far from a one-month high, and AMD fell nearly 8% to a three-week low; the US stock of TSMC, the world's largest chip foundry, fell 6.5%, and another major foundry leader GlobalFoundries fell 8.6%; chip equipment manufacturer KLA fell 9.5%, Applied Materials fell 7%, and ASML fell 6.5%; Qualcomm fell 6.9%, Broadcom, which will release its third-quarter report on Thursday, fell more than 6%, and Micron Technology fell about 8%; ARM, which had risen against the market when Nvidia fell last Thursday, also fell nearly 7%.
One of the reasons for the sharp drop in chip stocks: poor manufacturing, and the fall in chip stocks along with the U.S. stock market before the release of the heavyweight employment data
Market analysis pointed out that, first of all, the sharp drop in chip stocks today was following the sharp drop in the U.S. stock market.
U.S. stock indices all recorded their biggest drop since August 5, when July non-farm payrolls triggered strong concerns about a U.S. recession. This Tuesday, both U.S. August manufacturing data continued to shrink, and investors' concerns about a slowdown in the U.S. economy intensified again, triggering a stock market sell-off.
The Nasdaq 100 index, which is home to a large number of technology stocks, fell by 3%, and the Nasdaq also fell by more than 3% to its lowest level since August 12. The S&P 500 index fell by more than 2% to its lowest level since August 14, and the Dow Jones Industrial Average, which is home to a large number of blue-chip stocks, fell by 1.5%, or more than 620 points, falling below 41,000 points to its lowest level since August 22. The VIX, a "fear index" that measures the short-term volatility of the S&P, once rose by more than 40% to nearly 22.
Jordan Klein, an analyst at Mizuho Securities' trading desk, said investors may want to reduce their exposure to semiconductor stocks amid growing risks of an economic "hard landing."
Barron's cited Dow Jones market data as saying that the "Seven Sisters of U.S. Technology" fell 7.6% during trading on Tuesday, marking the largest percentage drop since April 19:
“The sell-off looks to be part of a sector rotation rather than being driven by specific news in the chip industry. September tends to be a tough month for stocks, and investors appear intent on selling ahead of a slew of economic data releases.”
Secondly, Nvidia's stock price has been falling since it released its earnings report after the market closed last Wednesday, highlighting concerns about the company's overvaluation, slowing revenue growth guidance, and the sustainability of the overall AI chip investment frenzy, which in turn dragged down chip and AI stocks.
Bill Blain, founder and senior strategist at Wind Shift Capital, said that Nvidia's falling stock price is sending a strong "sell" signal to U.S. stock investors, and its past sharp rise and huge valuation may also indicate that the 40-year market cycle has peaked:
"I just found the best reason to sell Nvidia, confirming that we are at the top of the market. What happens next? Rising inflation, rising interest rates and a global commodity super cycle over the next two decades are about to weigh on stocks as countries compete for strategic resources."
The second reason for the chip stock plunge: Weak chip sales data dampened the industry outlook
Another reason that exacerbated the selling pressure on chip stocks was that the July chip sales data released by the Semiconductor Industry Association (SIA) on the same day was below the seasonal trend, showing signs of industry weakness.
UBS analyst Timothy Arcuri said chip sales fell 11.1% from June to July, below the five-year and ten-year averages.
Arcuri noted:
"Memory was the main downside factor, with declines in major market segments, including MCUs (microcontrollers), DSPs (digital signal processors) and analog chips, all worse than their respective seasonal trends over the past five and ten years."
Morgan Stanley analysts said the report was "weaker than our expectations across nearly all product lines," adding:
"The overall market still looks weak. Although we still believe that sales in areas such as analog chips, discrete devices and MCU chips have bottomed out in the second quarter, the subsequent recovery will be limited."
Why Nvidia dragged down chip stocks: Its financial report made the market doubt the sustainability of huge investments in AI hardware
On the one hand, although Nvidia achieved solid results in the second quarter of fiscal year 2025 ending in July, with revenue and EPS doubling and revenue hitting a record high, based on a high base in the same period last year, its revenue guidance for the next quarter is US$32.5 billion.
This means that the year-on-year revenue growth rate will suddenly slow down from triple-digit percentages for several consecutive quarters to nearly 80%, which was interpreted by some as a sign of cooling demand for its AI chips. After the financial report, the share prices of chip manufacturers that supply memory and other components to Nvidia were hit.
Over the past year, chip stocks led by Nvidia have been leading the market, mainly because people are optimistic that the new trend of artificial intelligence will require companies to purchase more semiconductors and memory to meet the growing computing needs of AI applications.
But Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, pointed out that it is not surprising that "market stars" such as Nvidia and popular AI stocks have temporarily taken a back seat, after all, "the return on investment of all this spending is still a big question." The decline in chip stocks shows that people have doubts about the sustainability of investing huge amounts of money in AI computing hardware:
“Nvidia and other chipmakers have seen revenue surge, driven by heavy investments in (AI and chips) from companies like Microsoft and Alphabet. But the revenue gains these buyers are seeing from (AI) spending are still relatively small, and there are concerns about how long this can last.”
This also makes Broadcom's financial report after the market close on Thursday a hot topic, which can be used to observe whether the market's enthusiasm for the artificial intelligence trend is waning.
Why did Nvidia's second quarter report fall for several days despite being solid? Analysts say it is "digesting growing pains"
At the same time, for Nvidia itself, its stock price has fallen 14% in less than a week since its closing price before the release of its financial report on August 28. This is mainly because its financial report, although solid, is "not outstanding", at least not good enough for Wall Street, which has extremely high expectations.
Ken Mahoney, CEO of Mahoney Asset Management, said that people's "angry reaction" to Nvidia's financial report shows that after witnessing its stock price soaring more than 700% since the beginning of 2023, investors have become accustomed to Nvidia's financial reports not only exceeding market expectations, but also "completely destroying" expectations, which makes Nvidia's stock "perfectly priced" and leaves too little room for trial and error.
Bill Maurer, a columnist for Seeking Alpha, a U.S. stock research website, believes that Nvidia's price drop after the earnings report is "digesting some growing pains." As its stock price has doubled in the past year, investors and analysts have too high expectations, resulting in the company's latest earnings report exceeding market expectations by the smallest margin in five quarters, reflecting the huge challenge of meeting soaring expectations.
Moreover, Nvidia's stock price is currently well above its 200-day moving average, and "the stock price is quite high in the long run." In addition, the market dynamics of "buy rumors and sell facts" may appear after the Federal Reserve cuts interest rates as expected in September, which is unfavorable to Nvidia, which has a high valuation:
“One issue that investors and analysts will be more focused on in the coming quarters is gross margin. Non-GAAP gross margin fell more than 3 percentage points sequentially in the second quarter and is expected to fall further in the second half of the fiscal year. Margins are currently under pressure from the start of volume production of Blackwell.
As we move forward, NVIDIA's overall revenue growth will begin to slow slightly, as each subsequent quarter's year-over-year revenue challenges are significant and it is extremely difficult to maintain 100% or more revenue growth for a long time.
Whether Nvidia can achieve these goals will depend on the ramp-up of Blackwell, a super chip that has been delayed by a quarter to start in the fourth fiscal quarter of this year and continue into fiscal 2026.
On the conference call, management guided for Blackwell to generate billions in revenue in the fiscal fourth quarter, a number that should grow significantly next year, but analysts didn't get as much information as they would have liked, which may be one reason the stock is under pressure."
Mainstream analysts are still optimistic about Nvidia's long-term prospects, and Musk hints that he will continue to buy a large number of AI chips
However, despite Nvidia's recent stock price decline, most analysts still hold a "buy" rating on it. The target stock price represents some room for growth, and most people are still optimistic about Nvidia's "good long-term prospects."
For example, Tesla CEO Musk reminded this week that despite recent investor concerns, demand for chips in Nvidia's existing product line remains strong. His artificial intelligence startup xAI successfully launched the Colossus AI training infrastructure in just 122 days. It is powered by 100,000 Nvidia H100 GPUs and will become the "world's most powerful AI training system". In the future, it will also be integrated with Nvidia H200 chips, achieving "double the scale" in a few months.
The Motley Fool, a U.S. stock research website, believes that investors who sell off seem to have overlooked that Nvidia has achieved year-on-year growth in every business line outside of the data center, even the once-struggling gaming division. In contrast, AMD's second-quarter gaming chip sales plummeted by nearly 60% year-on-year, indicating that Nvidia can maintain strong demand even in markets where its competitors are struggling:
“In addition, judging by the price-to-earnings ratio (P/E ratio), Nvidia’s valuation does not seem too high compared to its main competitors AMD and Intel.
The business strength shown in its financial report also makes people believe that Nvidia will occupy 70% to 95% of the AI GPU market. The scale of the AI industry is expected to grow from $136 billion last year to $826 billion in 2030. Long-term investors can enjoy years of growth in the industry and get rewards from holding Nvidia stock. "
